By: Karin Bonding, Lecturer in McIntire Commerce School
We live in a time of near zero percent interest on our savings, whether they be at a bank, in a money market fund or money market account. We might be able to squeeze out 1% on a one-year CD or even 1.8% on a 5-year CD. This neither encourages us to save nor enriches us. Taking inflation into account, we are not breaking even. Bond rates are low reflecting the low interest rates by the Federal Reserve.
On the other hand, we are afraid to take on too much risk and place the money in the stock market, though dividends are there to be had, or in Master Limited Partnerships, which may also offer good dividends. The argument is: the stock market has gone up so much since 2009, how much longer will that go on? MLPs are often thought to be related to the energy market, so isn’t the drop in the price of oil going to affect those dividends? ( MLPs can be bought as a closed-end or open-end mutual funds.)
Investments incur risks. Past performance is no guarantee of future performance, as all investment-related documents will tell you. I am not here to recommend specific investments, but I may try to give you some guidelines.
As for dividend paying stocks, one of the best indicators of whether a company will continue to pay out its dividend is to look at their history. When you find companies that historically, year after year, have increased their dividend, and it is easy to see whether they did so in the downturns of 2000-2002 and 2008-2009, the companies will probably be able to weather another downturn in the stock market. Whereas the price of the stock may go up and down, the dividend remains the same. That’s an important piece of information when choosing a stock.
As for Master Limited Partnerships related to the energy industry, you may want to review the investments in the fund. Are the investments directly dependent on the price of oil, or are they providers of the pipelines, the gauges or the infrastructure? These will function whether the price of oil is $40 or $100 a barrel.
Finally, a thought you may wish to entertain. If you have debt – specifically a mortgage or student loan – and you have money sitting at close to zero percent in an account, you may want to pay off that debt now. If you argue that the interest on a mortgage or a student loan is deductible on your 1040, you are right, so going forward you will be missing that deduction. However, if you calculate how much interest you are paying yearly to the mortgage bank – and very soon you will be getting a statement that shows what you paid in 2014 in preparation for your 1040 – you can then see how much you’d save by paying off your debt. Take that money and give it to a charity! I am sure you have a favorite charity. In that way, you will still have a tax deduction and in the exact same amount as if you were paying the money to the bank. Does the bank deserve it more than your favorite charity? No, I didn’t think so.
Happy investing hunting in 2015. Make your money work for you in ways you’d never thought possible. Consult your adviser and CPA for additional guidance.